Skip to main content

Sound Advice: December 8, 2021

Individual Retirement Accounts

Years ago, the go-to choice for saving money for the future was savings accounts.  Back in what now seems like the stone age, you opened your account, got a passbook, and periodically deposited funds for the years ahead.  When you made your deposits, the teller would update the interest you earned and that was that.  The biggest problem was remembering where the passbook was. 

Folks who were more adventuresome and risk-tolerant opened brokerage accounts so they could buy stocks and bonds, often on the recommendation of their stockbrokers.  Those were the days of high-cost investing, before mutual funds took center stage.

In the mid-1970s, however, two major changes substantially improved the picture for individual investors.  One was the beginning of discounted commissions for buying and selling stocks.  The second was the debut of Individual Retirement Accounts (IRAs).  These accounts made it possible to invest for retirement and defer tax payments until funds were withdrawn.

The first of these is known as a Traditional IRA. It was later followed by a Roth IRA, SIMPLE IRA, SEP IRA, and Beneficiary IRA.

The Traditional IRA is relatively straightforward.  Contributions are made from pretax funds and they reduce the level of taxable income.  Gains and earnings in the account have no tax impact until funds are withdrawn.  The annual limit for contributions is $6,000.  For people who are 50 or older, the limit is increased to $7,000.  Required Minimum Distributions begin at age 72.

A Roth IRA is funded by contributions from after-tax income.  There is no tax on withdrawals and there are no Required Minimum Distributions.  Even so, funds cannot be withdrawn tax-free until five years have passed since the first contributions were made.  The contribution limits are the same as for Traditional IRAs.  The limits apply whether there is only one IRA or multiple IRAs.

Unlike the Traditional IRA and Roth IRA, which are set up by individuals, SIMPLE IRAs are set up by employers of companies with relatively steady profits. (SIMPLE stands for Savings Incentive Match PLan for Employees.) For these, contributions must be made by employers and may be made by employees.  The contribution limit for 2022 is $14,000 plus $3,000 for those 50 and older.  A SIMPLE IRA must be open for two years before a distribution can be made.

SEP (Simplified Employment Plan) IRAs are set up by sole proprietors and small business owners.  They are best suited for businesses with fluctuating income, allowing employers to decide the timing and size of contributions, which can be up to 25% of an employee’s annual salary or $57,000, whichever is less.  

Beneficiary IRAs are inherited IRAs.  Additional contributions may not be made.  For IRA accounts inherited after December 31, 2019, nonspouse beneficiaries must withdraw all funds within 10 years of the original owner’s death.  Spouses have more flexibility.  They can roll over the inherited IRA into their own existing individual retirement accounts and defer Required Minimum Distributions until age 72.

For all of these, there is the opportunity for tax postponement and savings.  This opportunity comes along with rules that require close attention.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

Any questions?  Please contact me at nrwayne@soundasset.com

Comments

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: January 15, 2025

Why investors shouldn't pay attention to Wall Street forecasts   Investors shouldn't pay attention to Wall Street forecasts for several compelling reasons: Poor accuracy Wall Street forecasts have a terrible track record of accuracy. Studies show that their predictions are often no better than random chance, with accuracy rates as low as 47%   Some prominent analysts even perform worse, with accuracy ratings as low as 35% Consistent overestimation Analysts consistently overestimate earnings growth, predicting 10-12%                 annual growth when the reality is closer to 6%.   This overoptimism can                 lead investors to make overly aggressive bets in the market. Inability to predict unpredictable events The stock market is influenced by numerous unpredictable factors, including geopolitical events, technological changes, and company-specific news.   Anal...